The DeFi Investor 14-02-2023

@TheDeFinvestor 17:06

The SEC is cracking down on centralized stablecoins.

It's time to look for decentralized alternatives.

Everything you need to know about decentralized stablecoins in a single thread 👇

Yesterday, the SEC announced that it's suing BUSD issuer, Paxos.

Less than a week ago, the SEC forced Kraken to shut down its liquid staking service.

Whether you live in the US or not, regulations are coming and it's best to use centralized
platforms as little as possible.

Contrary to what authorities are claiming, their recent actions don't benefit or protect
investors.

The SEC is just trying to strangle this industry.

And even if using decentralized platforms can't fully protect you from regulations, they are
definitely a better alternative.

There are currently 2 decentralized stablecoin types:

• over-collateralized - fully collateralized by liquid assets (ETH, USDC, etc.)

• algorithmic - these stablecoins aren't fully collateralized and can be minted or redeemed
against the protocol token

Since the UST collapse, most ones from the 2nd category fell into disgrace.

Yet Frax Finance continues to remain an important player in this field and it's worth keeping
an eye on it.

The issue is that both algorithmic & over-collateralized stables have to make a compromise:

• over-collateralized -more secure and resistant, but less capital efficient

• algorithmic - less resistant, but more capital efficient

To date, no stablecoin managed to solve the trilemma.

But here are a few of the most successful decentralized stablecoins:

1 $DAI - @MakerDAO

The biggest decentralized stablecoin.

$DAI can be minted against many blue-chip crypto assets, including ETH, BTC, as well as
yield-bearing assets.

(such as stETH & Curve LP tokens)

A concern raised regarding $DAI is that $DAI is mainly backed by $USDC.

If $USDC would completely lose its peg, $DAI would be heavily affected.
This is unlikely to happen, but good to keep in mind.

Another interesting fact is that MakerDAO has heavily invested in real-world assets,
generating over 50% of its revenue from RWA.

2 $FRAX - @fraxfinance

The first fractional decentralized stablecoin.

$FRAX is partially backed (mainly by USDC) and partially stabilized algorithmically.

Frax Finance utilizes Algorithmic Market Operations (AMO) to maintain $FRAX peg stability
and generate revenue.

The team has been building through the bear, launching many new products that increase
$FRAX utility & the protocol revenue.

Besides $FRAX, Frax Finance has launched a 2nd stablecoin dubbed FPI.

FPI is a CPI-pegged stablecoin, that aims to be inflation resistant.

Frax benefits from 3 main narratives:

• LSD -its liquid staking derivative is growing fast

• RealYield -revenue is shared with FXS holders

• decentralized stablecoins

Frax's long-term goal is to open a Fed Master account to reduce counterparty risk as much
as possible.
3 $LUSD - @LiquityProtocol

The most resilient decentralized stablecoin.

• Liquity smart contracts code is immutable

• Liquity contracts are accessible through many decentralized frontends
• $LUSD can be minted only against $ETH

• liquidations are handled through the stability pool

In short, no matter how strict the regulations would be, $LUSD can't be taken down.

And due to its efficient liquidation mechanism, the minimum collateral ratio for $LUSD loans
is 110%.

Anyone can participate in the liquidation process by depositing $LUSD in the stability pool
and essentially buying $ETH at discount.

Liquity is currently available on Ethereum and Aztec Network.

Borrowing $LUSD on Aztec can be done with extremely low fees and full privacy.
 Fully decentralized borrowing is live on Aztec, with:

- 26x cheaper gas fees than Layer 1

- no borrow minimums
- no interest

And of course, full privacy.

How?

Introducing the @LiquityProtocol x Aztec integration:

pic.twitter.com/UdG3M5hJAh

— Aztec (@aztecnetwork) February 10, 2023

4 $sUSD - @synthetix_io

A stablecoin over-collateralized by $SNX.

SNX stakers that mint $sUSD get a % of Synthetix revenue.

The target collateralization ratio is 400%, so $sUSD isn't very scalable.

But once Synthetix V3 goes live, more collateral types will be available.

5 agEUR - @AngleProtocol

The largest decentralized stablecoin pegged to €EUR.

As you may know, the EUR / USD exchange rate went from 1.21 in 2021 to 0.97 at the bottom
in October 2022.

This sharp decrease obviously led to a decrease in the interest for EUR stablecoins.

But given that EUR started to appreciate against the dollar again, this trend might change.

The Angle team has built an ecosystem of products around agEUR to increase its utility.

Borrow, get leverage, on-ramp/off-ramp fiat, and more from a single interface.

6. $MIM - @MIM_Spell

A decentralized stablecoin mainly backed by yield-bearing assets.

Despite its turbulent past, $MIM managed to keep its peg quite well.

Curve LP tokens, GLP, and other assets can be used as collateral while still earning a % of the
collateral yield.

Upcoming Stablecoins

RealYield narrative showed that people are looking for projects that generate revenue like
real businesses.

To create a new revenue stream and increase capital efficiency for liquidity providers, many
reputable protocols will launch their own stablecoins:

$GHO stablecoin (live on testnet) - @AaveAave

$crvUSD stablecoin (there aren't many details about its launch) - @CurveFinance

$DINERO stablecoin (backed by an $ETH liquid staking derivative) - @redactedcartel

$ERN stablecoin (the launch is a few weeks away) - @EthosReserve

A very interesting one is $crvUSD.

$crvUSD will use a new liquidation mechanism called the Lending-Liquidating AMM
algorithm.

Its borrowers will not have to worry about instant liquidations as the AMM will gradually
liquidate/deliquidate their collateral with no penalty fees.

These are the stablecoin projects to keep an eye on.

My hope is that the dominance of decentralized stablecoins will increase over time.

The collapse of many centralized, opaque systems in 2022 showed once again the
importance of decentralization.

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